Founded in 1993 by brothers Tom and David Gardner, The Motley Fool helps millions of people attain financial freedom through our website, podcasts, books, newspaper column, radio show, and premium investing services.

Why Home Depot Inc. Needed a New 1.6 Million Square-Foot Shipping Facility

The retailer isn't expanding its store footprint, so why buy a massive new distribution center?

At just shy of two million square feet, the building runs a mile long around its outer edge. It required as much steel to build it as you'd need to produce 3,000 trucks. The structure has some forward-thinking features, too -- including the 172 built-in fuel cells that provide alternative power sources for forklifts.

Inside Home Depot's new shipping facility. Source: Home Depot.

It's not about traditional retailingIt might seem odd that Home Depot (NYSE:HD) is investing in a splashy new distribution center, given that its store footprint isn't expected to grow at all this year. But then again, the Ohio fulfillment center that opened last week isn't about traditional retailing: It's Home Depot's third facility devoted entirely to online order processing. It's also easily the retailer's biggest structural bet on e-commerce. The other two centers, one in Georgia and one in California, weigh in at 1.1 million and 900,000 square feet.

Until last year, Home Depot had relied just on its network of 2,200 stores to act as e-commerce fulfillment centers. And that strategy has been working fine. Customers can buy home improvement products online and pick them up or return them at their local stores. Many locations also run delivery services right to shoppers' homes. However, almost half of Home Depot's online customers instead choose to pick up their orders from a nearby store.

Management's idea of interconnected retailing. Source: Home Depot.

Yet those ship-to-store initiatives weren't bold enough to respond to the rapidly shifting retailing atmosphere that has 7% of sales occurring online, compared to 4% five years ago. So, Home Depot's management decided to make a commitment to digital selling beyond just repurposing store locations. "To remain relevant to the ever-evolving customer today -- one who is digitally savvy and always connected -- Home Depot must continue to take risks and adapt," CEO Craig Menear said.

With this new facility up and running, 90% of U.S. customers can now receive products at their homes within two business days of an order being placed. The online business will also expand Home Depot's presence into a much wider capacity. It is selling 700,000 different items on its website, compared to 35,000 at a typical store.

Beating rivalsHome Depot is navigating the shift to online selling better than many traditional retailers. Its e-commerce business bounced to 5% of sales last year, up sharply from 2% in 2012. Compare that to Costco and Target, which only manage 3% of their sales from the online channel.

Home Depot's relative success is due to many factors, but the biggest is the way it has reinforced its online selling with its traditional business, and vice versa. E-commerce orders drive traffic to stores. And at the same time, store traffic powers online ordering. Consider this: Over 10% of the traffic to Home Depot's website actually comes from within its stores. Employees are trained to point customers toward the web shopping kiosks in the event that that can't find what they're looking for at the shop.

It's clear the e-commerce growth hasn't hurt Home Depot's store traffic trends so far, either; the number of checkout line transactions rose by a healthy 3% last year. So, it looks like the tight integration between its online and physical retailing presence can help Home Depot continue to grow faster than competitors through both sales channels.